Lululemon raised its full-year guidance as strong momentum in its core business in North America is expected to offset dimmed near-term expectations for its Mirror connected fitness platform as well as supply chain headwinds.

Guidance was raised for the third time this year as third-quarter results topped Wall Street expectations.

“Our strength continues to be broad-based and balanced across every facet of our business, including channel, category, activity, gender and geography,” said Calvin McDonald, CEO, on a conference call with analysts.

Q3 Sales Jump 30 Percent 

In the third quarter ended October 31, sales rose 29.8 percent to $1.45 billion year-over-year. On a constant dollar basis, net revenue increased 28 percent.

Sales topped Lululemon’s guidance in the range of $1.40 billion to $1.43 billion, given when it released second-quarter results on September 8. Wall Street’s consensus estimate was $1.43 billion.

Compared to the third quarter of 2019, revenue increased 58 percent, representing a two-year compound annual growth rate (CAGR) of 26 percent.

Total comparable sales climbed 27 percent or 26 percent on a constant dollar basis.

By channel, comparable store sales increased 32 percent or increased 31 percent on a constant dollar basis. Productivity in stores exceeded 2019 levels and continued improving productivity seen throughout the year.

Digital revenue increased 23 percent year-over-year and grew 21 percent on a constant dollar basis. On a two-year CAGR basis, digital revenue climbed 54 percent. Digital revenue represented 40.4 percent of total revenue compared to 42.8 percent for the third quarter of 2020.

By region, revenue advanced 28 percent in North America and surged 40 percent internationally. On a two-year basis, revenue grew 23 percent in North America and 42 percent internationally.

Gross Margins Improve 210 Basis Points From 2019 

Gross profit in the quarter increased 32 percent to $829.4 million. Gross margins reached 57.2 percent, up 110 basis points year-over-year and 210 basis points from the third quarter of 2019. The 210 basis points relative to 2019 were driven by 230 basis points of leverage on occupancy, depreciation and product team costs and 30 basis points of favorability in foreign exchange, which was partially offset by a 50 basis point decrease in product margin. Excluding a 230 basis point increase in air freight related to industry supply chain challenges, product margin would have increased versus 2019. Markdowns also declined relative to 2019.

SG&E expense increased to 37.6 percent of sales from 36.8 percent a year ago and 35.9 percent in the third quarter of 2019. The deleverage in the quarter versus Q3 2020 resulted from increased investments in people and brand building to support its growth initiatives, coupled with deleveraging on foreign exchange. The deleveraging relative to Q319 is primarily the result of the consolidation of Mirror’s results this year.

Operating earnings reached $257.9 million, up 25.9 percent year over year and ahead 46.7 percent against the third quarter of 2019.

On an adjusted basis, income from operations increased 32 percent to $282.1 million year-over-year. Adjusted operating margin increased 30 basis points to 19.4 percent year over year and was down 20 basis points against the third quarter of 2019.

Net earnings reached $187.8 million, or $1.45, up 30.7 percent year over year from $143.6 million, or $1.10, a year ago and ahead 49.0 percent from $126.0 million, or 96 cents, from the third quarter of 2019.

On an adjusted basis, earnings reached $211.3 million, or $1.62, up 39.7 percent from $151.3 million, or $1.16, a year ago and surging 67.7 percent from 126.0 million, or 96 cents, from the third quarter of 2019.

Earnings of $1.44 exceeded Lululemon’s guidance in the range of $1.28 to $1.33 while adjusted EPS of $1.62 topped guidance in the range of $1.33 to $1.38.

Elaborating on some highlights for the quarter, McDonald said that on a two-year CAGR basis, women’s revenues increased 24 percent, men’s grew 29 percent, and accessories surged 40 percent. He said, ‘We continue to leverage the Science of Feel to bring product newness and innovation to our guests.”

McDonald was bullish on the benefit expected from its recently announced multiyear partnership to outfit the Canadian Olympic Committee and Paralympic Committee. McDonald said, “First, it allows us to showcase the Lululemon brand and our technical expertise within apparel on the world stage. Next, it is a compelling platform that we can leverage to continue to grow our brand presence in Canada, our most mature market. And finally, it offers a new and exciting test and learn opportunity to increase our brand awareness and consideration with men, both inside and outside of Canada.”

Mirror 2021 Growth Expectations Slashed

On Mirror, McDonald said Lululemon continues to look to the connected fitness platform to support retention and engagement with Lululemon customers, but he also noted that 2021 “has been a challenging year for digital fitness,” referencing the challenges facing Peloton, among others.

He said, “We have seen increasing pressures on CAC (Customer Acquisition Cost) that are impacting the entire industry.”

As a result, Lululemon lowered its revenue guidance for Mirror for the year to $125 million to $130 million. Lululemon maintains its dilution estimate from the Mirror acquisition of 3 percent to 5 percent. Mirror is expected to represent less than 3 percent of revenue this year.

On the positive side, Mirror subscribers have grown by 40 percent year-over-year. 

The retailer will continue to market Mirror through its owned marketing channels, including stores, but will pull back on other marketing expenses. McDonald said, “We will not chase growth at any cost.”

Added McDonald, “Although we do not require it to deliver our Power of Three goals, we see Mirror as an opportunity to engage with our guests in new ways that we will continue to evolve and refine over time. We are still early in creating our vision of a loyal community that captures the best of Lululemon. This is not a sprint for us, and we will maintain a steady pace forward that realizes our vision.”

Lululemon Store Revenue Bounces Back

Total store revenue grew 38 percent versus last year and 10 percent on a two-year CAGR basis, and traffic increased over 50 percent versus last year. Said McDonald, ‘We’re pleased with the start of the holiday season in stores.”

He added, “We continue to leverage and enhance our in-store and omni capabilities, including enhancing our mobile app to facilitate curbside pickup for guests, make our in-store handheld units more intuitive for our educators to help speed guests through transactions and continue to offer our online digital educator service at no cost providing a personal shopping experience for guests who can’t make it into our stores.”

E-commerce’s 21 percent gain came on top of a 93 percent increase in the same quarter last year. McDonald said,” We continue to enhance the experience for our guests on our websites and apps, which is the direct result of the investments we have made over the last 18 months, and it is paying off for us.”

Online growth is being supported by in-store pickup and in-store fulfillment. McDonald said, “Looking forward to the fourth quarter, we feel good about our ability to handle the increased volume of traffic based on the significant investments we’ve made over the last several years in technology, IT infrastructure, our guest education center, and DCs, all of which continue to produce results.”

In its international segment, strength was seen across all major regions, with each generating strong double-digit sales growth on a two-year CAGR basis.

In China, a two-year CAGR growth of more than 70 percent outpaced its overall international performance. In Europe, two-year CAGR revenue growth of over 20 percent was driven by broad-based strength across most key markets coupled with an improving brick-and-mortar business in the UK following prolonged COVID-19-related closures.

Lululemon remains on track to open 40-to-45 stores internationally this year.

Inventories Climb 22 Percent 

At the end of the third quarter, inventories increased 22 percent, slightly ahead of its most recent expectations of 15 percent to 20 percent.

“We continue to face the same issues as much of the industry, including port slowdowns and increased costs associated with air freight,” said McDonald. “In Vietnam, I am pleased to share that all of our factories have reopened and continued to ramp up their capacity.”

McDonald noted that approximately 40 percent of Lululemon’s inventory includes core season-less products, which help make inventory management and flow decisions. Coupled with “well-established partnerships” with factory partners, this has helped Lululemon mitigate many of the current supply chain risks.

“I’m extremely proud of how our teams have and continue to successfully navigate through this dynamic environment,” said McDonald. “While we’re comfortable with both the quality and quantity of our inventory, I continue to believe that demand for our brand is outpacing supply, and our business could have been even stronger without the supply chain challenges.”

Fourth-Quarter Outlook 

Looking to the current quarter, McDonald said that the five days spanning Thanksgiving through Cyber Monday, the company’s digital and brick and mortar channels performed well. E-commerce delivered record-breaking days in key metrics, including sales, traffic and conversion, and Thanksgiving Day was the retailer’s highest-volume e-commerce day to date.

McDonald said, “The investments we have made over the last several years are enabling the acceleration we’re seeing in the digital business and contributing to the growth this year on top of last year’s outsized performance. While we still have several large volume weeks ahead of us, it was great to see our guests respond well to our merchandise offering as we kicked off the holiday season.”

For the fourth quarter, Lululemon expects net revenue to be in the range of $2.125 billion to $2.165 billion. Diluted EPS is expected to be in the range of $3.24 to $3.31 for the quarter and adjusted EPS in the range of $3.25 to $3.32. In the 2020 fourth quarter, sales were $1.73 billion, EPS was 2.52 and adjusted EPS was $2.58. Lululemon reported EPS of $2.28 in Q419.

Guidance for 2021 now calls for:

  • Revenue in the range of $6.250 billion to $6.290 billion, up from a range of $6.190 billion to $6.260 billion previously;
  • Diluted EPS in the range of $7.38 to $7.45 for the year, up from a range of $7.16 to $7.26 previously; and
  • Adjusted diluted earnings per share in the range of $7.69 to $7.76, up from $7.38 to $7.48 previously.

Photo courtesy Mirror